Case may void foreclosures

The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from homeowners seeking to overturn seizures.

Kathleen M. Howley

BOSTON — The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from homeowners seeking to overturn seizures.

The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation's oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn't hold the note proving she was obliged to pay the mortgage.

"If the Massachusetts court says this defense works, that would have a huge ripple effect across the country," said Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif.

A ruling in favor of Eaton would show how a $25 billion settlement reached this month with state and federal officials still leaves banks exposed to liabilities tied to home repossessions. It also underscores the challenge of resolving a foreclosure process that Federal Reserve Chairman Ben Bernanke said in a study last month is plaguing the housing recovery.

At issue in Eaton v. Federal National Mortgage Association, also known as Fannie Mae, are two documents borrowers sign to get a home loan.

The first is the mortgage establishing the right to seize a property. The second is the promissory note that creates an obligation to pay the debt. While the servicer had the mortgage when it foreclosed, it didn't have the note. One without the other is known as a naked mortgage.